TY - JOUR AU - Levin,Andrew T. AU - Onatski,Alexei AU - Williams,John C. AU - Williams,Noah TI - Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models JF - National Bureau of Economic Research Working Paper Series VL - No. 11523 PY - 2005 Y2 - August 2005 UR - http://www.nber.org/papers/w11523 L1 - http://www.nber.org/papers/w11523.pdf N1 - Author contact info: Andrew T.. Levin Federal Reserve Board Mail Stop 77 20th and C Street, NW Washington, DC 20551 Tel: 202-452-3541 Fax: 202-452-2301 E-Mail: andrew.levin@frb.gov Alexei Onatski Department of Economics University of Cambridge Cambridge, UK E-Mail: ao319@cam.ac.uk John Williams Federal Reserve Bank of San Francisco Economic Research Department, MS 1130 101 Market St. San Francisco, CA 94105 Tel: (415) 974-2240 Fax: (415) 974-2168 E-Mail: john.c.williams@sf.frb.org Noah M. Williams Department of Economics 1180 Observatory Drive University of Wisconsin Madison, WI 53706-1393 Tel: 608/263-3864 E-Mail: nmwilliams@wisc.edu M1 - published as Andrew T. Levin, Alexei Onatski, John Williams, Noah M. Williams. "Monetary Policy Under Uncertainty in Micro-Founded Macroeconometric Models," in Mark Gertler and Kenneth Rogoff, editors, "NBER Macroeconomics Annual 2005, Volume 20" MIT Press (2006) M2 - featured in NBER digest on 2005-08-01 AB - We use a micro-founded macroeconometric modeling framework to investigate the design of monetary policy when the central bank faces uncertainty about the true structure of the economy. We apply Bayesian methods to estimate the parameters of the baseline specification using postwar U.S. data, and then determine the policy under commitment that maximizes household welfare. We find that the performance of the optimal policy is closely matched by a simple operational rule that focuses solely on stabilizing nominal wage inflation. Furthermore, this simple wage stabilization rule is remarkably robust to uncertainty about the model parameters and to various assumptions regarding the nature and incidence of the innovations. However, the characteristics of optimal policy are very sensitive to the specification of the wage contracting mechanism, thereby highlighting the importance of additional research regarding the structure of labor markets and wage determination. ER -